KUALA LUMPUR: A growing oversupply in the iron ore market is damaging the credit quality of producers, posing risks to the downside, said Moody’s Investors Service Inc.

In a sector report yesterday, the global rating agency estimates over 300 million tonnes of new and expanded production will come onstream in the next several years.

“With the muted growth in global steel production until at least 2016, the lack of equilibrium will continue to weigh negatively on prices and operating performance of iron ore producers,” it said.

Based on the estimation, Moody’s has revised its price of iron ore for the period through 2016 from a range of US$75 (RM245) per tonne to US$85 per tonne.

“Downward rating actions for iron ore producers could result as Moody’s reassesses the impact of a protracted pricing weakness,” it said.

Moody noted that low-cost producers such as BHP Billiton Ltd, Rio Tinto and Vale SA are able to absorb lower prices in the near term than Cliffs Natural Resources Inc, Fortescue Metals Group Ltd and Atlas Iron Ltd.

“But the compression of earnings and cash flow is nonetheless value destructive for the sector,” said Moody’s senior vice-president of corporate finance group Carol Cowan.

This article first appeared in The Edge Financial Daily, on October 21, 2014.